The peer performance ratios of hedge funds

We define the outperformance (resp. underperformance) of an investment fund as the percentage of funds in the peer universe for which the true performance of the focal fund is higher (resp. lower). We show that the p-values of the pairwise tests of equal performance can be used to obtain estimates of the out- and underperformance ratio that are robust to false discoveries - estimated alpha differentials for which the significance test has a low p-value while the true alpha is identical. When applied to hedge funds, we find that ranking funds on the outperformance ratio leads to a top quintile portfolio with a higher absolute and risk-adjusted performance than when the estimated alpha is used.